Currency-focused hedge funds performed poorly, hurt by volatile dollar

June 7, 2013, 3:35 p.m. ET

Hedge Funds Hurt by Volatile Dollar

By MATTHEW WALTER and CLARE CONNAGHAN

Currency-focused hedge funds performed poorly as the dollar swung back and forth in May and even worse during the greenback’s fall this past week, according to a widely watched barometer of these investors’ returns.

The Parker Global Currency Managers Index, which tracks the performance of 17 funds in which Parker Global Strategies LLC invests, fell 0.58% last month, according to a preliminary figure provided by the company.The index also had a rocky start to the month of June, losing 0.92% in the week through Thursday, Parker said. Currency funds are down 0.03% in 2013.

Volatility in currency markets has jumped in recent weeks, making it more difficult for hedge funds that place currency bets to make profitable trades. Earlier in the year, a sustained decline in the yen and a rally in the dollar fueled better performance. But many funds were caught off guard by a sharp selloff in the greenback in recent weeks, including steep declines against the euro and yen on Thursday that were followed by a rebound on Friday as the dollar gained against most major currencies.

Those currency swings were largely driven by changing expectations for the Federal Reserve’s bond-buying program, which is designed to keep interest rates low to support the economy and has weighed on the dollar’s value. Earlier in the week, disappointing manufacturing data led investors to question whether the Fed would be able to start winding down the bond-purchasing program this year, driving the dollar lower. But a promising employment report on Friday reinforced the view that the Fed program could be tapered in coming months, propelling investors back into the dollar.

The uncertainty has made for particularly frantic trading. Both Citigroup Inc.C +1.51% and Barclays BARC.LN +1.48% PLC, the second- and third-largest foreign-exchange trading banks by market share, reported surging trading volumes this past week.

Citigroup said it processed a record number of trades on Thursday, the same day that Barclays said was its second-busiest trading day in the dollar in the past year.

Many currency-focused funds have struggled to keep up. In the years since the end of the global financial crisis, active central-bank policies designed to calm market panics, such as the Fed’s bond-buying program, have complicated efforts to bet on currencies based on their economic fundamentals. The often unpredictable timing of those interventions by monetary authorities also caused problems for investors who operate computer-model-driven investment strategies.

FX Concepts, a currency-focused fund with about $1.5 billion under management, had pared back many of its bets in recent weeks amid the increased volatility. But the fund was still slightly long the dollar and short the yen and Swiss franc on Thursday, which resulted in some trading losses, said Robert Savage, the company’s chief strategist.

“The last two weeks of trading have been very difficult,” Mr. Savage said.